Chevron May Have Unlocked a Powerful New Growth Engine

You know it as an integrated oil and gas outfit, and that's still mostly what it is. Energy powerhouse Chevron (NYSE: CVX), however, is also now becoming something else. And it's a brilliant move.

Bypassing the middleman

Chevron is moving into the artificial intelligence (AI) data center space. Last month, the company announced it's partnering with GE Vernova (NYSE: GEV) to supply software giant Microsoft (NASDAQ: MSFT) with electricity for one of its AI data centers in West Texas. GE Vernova will supply the natural gas turbines, and Chevron will supply the natural gas. The agreement has a 20-year term.

Image source: Getty Images.

There's nothing unusual about the contract's individual components. Microsoft already owns and operates data centers, and GE Vernova makes power-generating gas turbines. In addition to turning crude oil into gasoline, Chevron collects and sells natural gas. What's new is that the organizations involved are working together to solve a very specific problem in a way that bypasses the usual utility service business model.

This is just a one-off for now. However, this self-contained solution model could become the norm for the AI data center industry in the (very) foreseeable future.

Opportunity ahead for Chevron?

Simply put, the world's power utility companies aren't ready to supply the amount of electricity the artificial intelligence industry will soon need to power its planned data centers. Research posted by Goldman Sachs in May puts things in perspective, predicting that data centers located in the United States alone would double their total consumption of electricity between 2025 and 2027, although consumption will continue growing at a brisk pace well beyond next year.

The simplest solution to the near-term problem is to work around the nation's limited electrical grid and utility companies by supplying your own power. And the industry is embracing the idea. Research outfit RAND expects the nation's so-called "behind the meter" power generation capacity to roughly triple between now and 2030, reaching 49 gigawatts.

Natural gas power turbines should be the single biggest source of this capacity expansion, too. A recent PwC outlook notes that AI-linked demand for natural gas could more than quintuple between last year and 2035. Suppliers with existing infrastructure -- like Chevron -- that don't require new, costly construction or time-consuming permitting are already in a position to win at least their fair share of this growth.

Not a game changer (yet), but certainly worth watching

It's too soon to consider this project with GE Vernova for Microsoft as a whole new business venture. At this stage, it looks more like an experiment or a proving ground.

As noted, though, there's nothing particularly new or novel about the technology or logistics of the agreement; these components already exist. What's new is the relationship that bypasses utility companies' usual role. But that's not a particularly high hurdle to clear.

As for investors, it's not a reason in and of itself to take a stake in Chevron, particularly given the time it would take to grow the idea into a full-blown profit center. It's certainly something worth putting on your radar, though.

James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron, GE Vernova, Goldman Sachs Group, and Microsoft. The Motley Fool has a disclosure policy.